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Medicare cliff looms: Status quo isn't sustainable

The Hill's Congress Blog
January 31, 2013

by Sally Pipes

President Obama just named protecting Medicare for future generations as one of his chief goals in the negotiations over the federal deficit and nationaldebt.

Unfortunately, by championing Medicare's structural status quo, the president is putting current seniors' care at risk -- and may still leave the entitlement program short of funds to pay for future retirees.

Take the portion of the "fiscal cliff" deal that cuts $15 billion in payments to hospitals.

Jan Emerson-Shea of the California Hospital Association called the cuts a "huge hit" to hospitals. Hospitals in New York expect to lose $1.3 billion over the next decade, while those in Illinois could see a $1.75-billion reduction in Medicare payments. The New Jersey Hospitals Association figures the cuts will amount to $84 million in 2014 alone.

The Medicare Payment Advisory Commission recommends undoing the cuts and increasing hospital payments next year. "The base rate should increase by 1 percent, regardless of the Taxpayer Relief Act," said Glenn Hackbarth, the board's chairman.

So why were these cuts made? Was it because hospitals were being overpaid? Or were they the result of some new efficiency breakthroughs?

No. The cuts were intended to prevent an even steeper reduction in payments to doctors who treat Medicare patients.

In 1997, Congress tried to "protect Medicare for future generations" by creating the "sustainable growth rate" -- legislating that the growth in spending per Medicare beneficiary not exceed GDP growth.

But for the past 10 years, Congress has put off the cuts in physician payments provided for by this sustainable growth rate with what is called a "doc fix." Without the fix this year, reimbursements for doctors would have declined by $30 billion, or 26 percent.

Put simply, lawmakers are robbing Peter to pay Paul.

Even with the fix, Medicare underpays doctors. Worse, healthcare providers are in for still more payment reductions.

They face a 2-percent across-the-board cut starting this March. And the president's healthcare law will cut more than $700 billion from payments toproviders as a way to finance its insurance subsidies for those who earn between 133 percent and 400 percent of the federal poverty line -- or up to$92,200 for a family of four.

Even now, Medicare's low payment rates are pushing doctors to abandon the program. Nearly one in five physicians say they can no longer afford to seenew Medicare patients. Ten percent don't take any Medicare patients at all, according to a survey of doctors by Jackson Healthcare.

Other surveys find that nearly a third of physicians will stop taking Medicare patients because of Obamacare's cuts. Medicare's own actuary says that as many as 15 percent of hospitals serving Medicare patients will become unprofitable because of the reimbursement reductions.

Even with all those scheduled cuts, the program's Hospital Insurance Trust Fund is set to run out in just over a decade. As the Medicare Trustees drylystate in their most recent annual report, "further action is needed to address the program's continuing cost growth."

Medicare's per-enrollee costs have grown faster than overall per-capita health spending in three of the past four years even after taking into account the aging of the population, according to the Centers for Medicare and Medicaid Services. The Congressional Budget Office predicts that Medicare will cost $1 trillion by 2024, almost double the cost today.

Tweaking reimbursement rates won't fix this underlying problem. Transforming the program into one governed by market competition could.

To start, we must grant patients control over their healthcare spending and incentivize them to make smart, cost-conscious decisions.

Right now, seniors have little to no idea what their care actually costs. They simply fork over a co-pay or a premium and wend their way through thesystem. Without accountability, both patients and doctors are presented with a strong incentive for over-consumption.

But if our leaders took the money already being spent on Medicare and gave it directly to seniors as a means-tested voucher so that they could purchasethe kind of coverage they wanted, competition among both insurers and healthcare providers would take root. Such a move would yield lower prices,better quality, and lower costs for the federal government.

The Medicare status quo isn't sustainable. Rather than pretend to protect Medicare with phony "fixes," lawmakers must chart a new course governed bymarket principles.